Yahoo Finance Bank Stock Roundup: Weak Q1 Trading Outlook; Citi & Wells Fargo in Focus
While the issues in China, heightened market volatility, absence of clarity over rise in interest rates and unclear outlook of oil prices have forced investors to remain on the sidelines, the lower trading revenue outlook provided by some of the major banks signified that the earnings picture will remain subdued in the first quarter. Banking stocks remained under pressure over the last four trading days due to global growth concerns and a bleak first-quarter revenue outlook.
Moreover, the European Central Bank’s decision of tapering rate on deposits held for Europe's banks to -0.4% from -0.3% has created pressure on the U.S. policymakers’ decision to raise rates or not at a meeting next week (March 15-16).
Big U.S. banks are on their toes and preparing for higher interest rates, though the efforts are yet to bear fruit. Notably, banks have increased the portion of the securities classified as “held to maturity” to hedge against the anticipated downside in bonds resulting from higher interest rates.
The last four trading days for banking stocks did not remain unscathed from legal issues. Headlines pertained to banks' strategies for boosting profitability as well as regulatory and legal issues. The law enforcement agencies have also set to work to resolve such issues and avoid lengthy litigations. (Read: Bank Stock Roundup for the week ending Mar 7, 2016)
Recap of the Week’s Major Developments:
1. At the RBC Capital Markets 2016 Financial Institutions Conference in New York, Citigroup Inc.’s C Chief Financial Officer – John Gerspach came up with its latest outlook for the first quarter. The bank expects first-quarter 2016 trading revenue to drop by 15% year over year, impacted by elevated volatility. Moreover, investment banking revenues are expected to be down 25% year over year due to less issuance of debt and equity.
Broadly, the lower outlook follows pressurized spread products and other fixed-income products revenue along with the need to maintain higher capital to meet regulatory requirements. Further, increase in market volatility and reduced commodity prices have slowed down the financial industry globally on a significant note (read more: Citi Expects Weak Q1 Trading & Investment Banking Revenues).
2. Legal troubles seem to be never ending for banks. Recently, the U.S. regulator – Securities and Exchange Commission (SEC) sued Wells Fargo & Company WFC along with a Rhode Island government agency in a civil fraud. SEC accused both of misleading investors in a municipal bond offering, which was issued for financing a startup video game company founded by former Philadelphia Phillies ace pitcher Curt Schilling.
The SEC’s investigation revealed that Schilling’s company, 38 Studios, failed to produce a multiplayer online game in the market at the stipulated time due to shortage of financing. Therefore, on failure to get additional financing, the company failed to bring game to the market and defaulted on loan as well. Further, it was bankrupt in 2012 and taxpayers were held responsible for the repayment of money (read more: Wells Fargo Continues to Suffer for Misdeeds, Sued by SEC).
Further, in another release, the U.S. Supreme Court dismissed separate pleas by three major financial firms seeking to recuperate millions of dollars in foreign tax credits. The firms – BB&T Corporation BBT, The Bank of New York Mellon Corporation BK and American International Group, Inc. AIG – alleged that the Internal Revenue Service (“IRS”) was wrongfully denying them of tax credits.
Without providing any reason, the Supreme Court upheld the lower court’s orders in favor of the U.S. Department of Treasury. Per court papers, BNY Mellon had sought tax credits worth $200 million, while BB&T was seeking a credit for $500 million in taxes to the U.K. AIG had appealed for a tax credit worth $48.2 million for transactions made in 1997 (read more: BB&T, BNY Mellon & AIG Foreign Tax Credit Pleas Rejected).
3. Amid the growing trading volumes in the credit-default swaps (CDS) market, Wells Fargo plans to boost its trading in the derivative. The company is likely to trade CDS linked to individual companies in the next quarter. The California-based banking giant intends to trade single-name credit swaps that are backed by a central clearinghouse, which would reduce its transaction costs.
The SEC has not yet mandated single-name credit swaps to comply with the trading and clearing requirements, which would reduce their liquidity. While tighter regulations and a weak trading scenario led to the gradual fading of the credit-CDS trade, the current trends are suggesting a reversal mode. The market volatility in recent times has reinforced attraction for CDS among investors (read more: Wells Fargo to Boost Credit Default Swaps as Trading Rises).
4. Citigroup is reportedly expanding trading in credit derivatives. Over the past few weeks, the banking giant has extended its offerings in the total-return swaps (TRS) to include investment-grade debt. As trading in the credit markets has become time consuming and costlier amid declining liquidity, investors are finding derivatives more attractive as it facilitates placing bet on debt easily. Stricter regulations have resulted in shrinking dealer inventories. Though TRS trading is in its nascent stage, but it is in upward trend.
5. Recognizing global challenges and risks emanating from climate change, JPMorgan Chase & Co. JPM is pulling back from financing coal mining projects. The company disclosed this in the latest version of its Environmental and Social Policy Framework published on its website. For coal mining companies, this news comes as a big dampener. Coal miners are already smarting under pressure posed by cheap natural gas and the inclination of power generating units toward alternative sources of energy. All these have drastically lowered the demand for coal (read more: JPMorgan Backs Clean Energy; to Avoid Financing Coal Mines).
6. KeyCorp.’s KEY deal to acquire First Niagara Financial Group Inc. FNFG has suffered its share of setbacks since it was announced in October 2015. However, both the companies in separate regulatory filings disclosed that class-action lawsuits filed in New York State by First Niagara shareholders have been settled, bringing some much-needed respite.
However, both the companies will have to make additional proxy material disclosures to investors ahead of the shareholder vote set for Mar 23. While the settlement still needs approval in the State Supreme Court, similar lawsuits filed in the Delaware Chancery Court have not been settled.
Price Performance
Overall, the performance of banking stocks was bearish. Here is how the seven major stocks performed:
Company | Last Week | 6 months |
JPM | -2.2% | -5.2% |
BAC | -1.9% | -16.7% |
WFC | -3.1% | -6.4% |
C | -2.9% | -18.8% |
COF | -0.4% | -7.7% |
USB | -3.1% | -2.7% |
PNC | -2.1% | -4.9% |
In the last four trading sessions, Wells Fargo and U.S. Bancorp were major losers, with their shares decreasing 3.1%. Moreover, Citigroup declined 2.9%.
Over the last six months, Citigroup was the weakest performer, with its shares declining 18.8%. Also, Bank of America Corp. BAC and Capital One Financial Corp. COF shares fell 16.7% and 7.7%, respectively.
What's Next in the Banking Universe?
Over the next five trading days, performance of banking stocks will likely continue in a similar manner unless anything surprising happens.
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JPMORGAN CHASE (JPM): Free Stock Analysis Report
BB&T CORP (BBT): Free Stock Analysis Report
KEYCORP NEW (KEY): Free Stock Analysis Report
BANK OF NY MELL (BK): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
CAPITAL ONE FIN (COF): Free Stock Analysis Report
FIRST NIAGARA (FNFG): Free Stock Analysis Report
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